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Saturday, December 27, 2008
In these unpredictable and uncertain financial times, Options Trading is becoming popular. Options trading is one way to create a quick profit with a smaller investment. Another benefit of options trading is the limited exposure to loss that it offers.
Savvy investors come to the table prepared, and they will approach Options Trading with a system. Options Traders should be aware of the relationship between risks and rewards when investing, and they will appreciate the versatility of this particular investment vehicle.
Options trading takes place in the stock market. Trading can be done with a variety of financial instruments such as stocks, commodities, bonds, indexes, and currencies. Options traders will select the financial instrument that works best for their options trading system of choice.
An option allows a person the right to buy or sell their chosen item at a future date for a specific price known as a Strike Price. Thus, an option trader speculates on the future price of a specific item.
Options can be used with a put (sale) or with a call (purchase). An options trader will decide to purchase or to sell their option based upon their own systematic approach to this type of investment. The decision to put or to call is important, and it relates to your strike price.
You would want to Put or sell your option when the strike price is higher than the price for your investment type. If your investment is below the strike price, the loss is limited to your put cost. The put gives you the right, but not the obligation, to sell your option.
Similarly, a Call will give the investor the right to buy an item but they are not obligated to do so. If the expectation is that prices will increase for your financial instrument then a call would be used to sell your option for a profit. If the financial instrument falls below the strike price then losses would be limited to the cost of the call.
When purchasing options you can easily limit your risk, but when you sell an option, you leave yourself open to an unlimited amount of risk. Nevertheless, selling an option is very attractive as generally 85% of all options eventually expire worthless.
Savvy investors come to the table prepared, and they will approach Options Trading with a system. Options Traders should be aware of the relationship between risks and rewards when investing, and they will appreciate the versatility of this particular investment vehicle.
Options trading takes place in the stock market. Trading can be done with a variety of financial instruments such as stocks, commodities, bonds, indexes, and currencies. Options traders will select the financial instrument that works best for their options trading system of choice.
An option allows a person the right to buy or sell their chosen item at a future date for a specific price known as a Strike Price. Thus, an option trader speculates on the future price of a specific item.
Options can be used with a put (sale) or with a call (purchase). An options trader will decide to purchase or to sell their option based upon their own systematic approach to this type of investment. The decision to put or to call is important, and it relates to your strike price.
You would want to Put or sell your option when the strike price is higher than the price for your investment type. If your investment is below the strike price, the loss is limited to your put cost. The put gives you the right, but not the obligation, to sell your option.
Similarly, a Call will give the investor the right to buy an item but they are not obligated to do so. If the expectation is that prices will increase for your financial instrument then a call would be used to sell your option for a profit. If the financial instrument falls below the strike price then losses would be limited to the cost of the call.
When purchasing options you can easily limit your risk, but when you sell an option, you leave yourself open to an unlimited amount of risk. Nevertheless, selling an option is very attractive as generally 85% of all options eventually expire worthless.
About the Author:
TheScienceOfTrading.com provides 90 free minutes of videos on option trading tips and provides a complete and detailed option trading course for beginners to experts.
posted by Credit Counseling at
4:22 AM
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